Chosen Thought

Posts Tagged ‘Lease’

The decisions that business owners have to make are hard. Why do they choose to purchase equipment? How do they decide to lease equipment? What kinds of economic issues do they take into consideration? The article is going to discuss how leasing might benefit your company or how you might want to just purchase equipment outright.

Obviously the steps in making a decision to purchase equipment are a factor that you have to consider. Is your equipment old and not cutting it for your client’s demands? The first option a business owner has is to purchase the equipment from capital saved up. The benefits of doing so are you don’t have to worry about payments on a monthly basis. Most company owners are feed up with the lease or loan process. Purchasing equipment outright limits paperwork that can delay much needed time on the piece of equipment. Also the calculation that a business owner does before purchasing the equipment tell them to buy with cash because of the return expected with signing of a new client. The price of the equipment is low and affordable to pay out of pocket. Obviously there are many more reasons to purchase equipment outright that are not mentioned.

Leasing? Why should I pay that interest rate when I can pay for the equipment? That is the question most business owners will ask themselves. Leasing of equipment provides your company a tax shelter that limits your exposure at the end of the year to the government. Leasing also provides your business with low monthly payments that makes any piece of equipment affordable for small or big business. Also provides businesses with the opportunity to have the equipment pay for it self. The options your company will have with leasing are limitless.

Despite stringent disclosure rules which aim to even things up between the supposedly rapacious seller and the innocent purchaser, it’s very easy for a buyer of a small family business to be caught by buying a dud.

If you’re stuck with a dud business as a result of being deliberately deceived you certainly can take them to court. But you don’t need me to tell you of the costs of litigation, the time it takes (years!), and the very real chance you may not succeed anyway.

Trap: The Demolition Clause

Before I left the shop I had asked the owners for a copy of the lease. They told me it still had 4 years to go and there was an option to renew for another 5. Good.

I read the lease and found it had a demolition clause in it. This allows the landlord to terminate the lease with minimal notice if they planned to demolish and redevelop the mall. And there is no compensation to the unfortunate lessee.

The trouble with a demolition clause is that it can be triggered at any time by the landlord and usually with very short notice. You might assume (or be told) that it would only be used to periodically give the center a makeover, which is not necessarily a bad thing. You have a lovely new shop and traffic through the center increases.

But a demolition clause does not in any way guarantee that you will get a new shop or that an office block (or whatever) will not be built on the site with no room for your shop.

So, in essence, you could lose everything. Where I have seen businesses with this clause in the lease, I usually say don’t buy it – just walk away.

Trap: The Refurbishment Clause

I then discovered a clause that said the shop had to be refitted and refurbished every 7 years to a minimum standard dictated by the landlord and at the lessee’s expense. The 7 years was up in two years time and I estimated it would cost about $100,000.

Retail shops do have to be refurbished from time to time, otherwise they may lose customers. But it should be the owners decision when to do this and how much to spend on it. This clause does not necessarily mean you should not buy. But it certainly gives you grounds for negotiating a lower price.